MARKET COMMENTARY

SELL IN MAY AND GO AWAY?

After an extremely volatile and disruptive week, to say the least, when looking at both the political and capital market landscapes, it could be fair to say that less pain may have been felt if one had taken a step out of capital markets at the end of April 2019. As the month of May stands, the South African JSE Top 40 Index has lost around 7.50%, and who knows what else may still be lurking in the undertow. With the US-China trade war starting to turn slightly awkward, one gets the sense that a growing number of investors may have commenced dipping into various forms of wealth protection solutions, rather than dabbling in the uncertainty of the debilitating ebbs and flows of the environment they’ve suddenly found themselves in.

GLOBAL DATA AND POLITICS

When looking at global data points this week, the preliminary release of Japanese gross domestic product(GDP) numbers pointed toward a surprisingly stronger quarter one (Q1) - year-on-year(YoY) figures coming in at 2.10% vs an expected -0.20% and quarter-on-quarter(QoQ) numbers coming in at 0.50% vs an expected -0.10%. Staying east, China saw their industrial production and retail sales numbers slipping, YoY, during April – this, surely the slow engulfing effect of the trade war.

Overall, the Eurozone took a small step back on service and manufacturing purchasing manager index (PMI) numbers this week. A general slowdown in productivity can be seen edging its way into the region. Although still fairly negative, consumer confidence across the Eurozone seemed to edge up during May.

Amazingly US jobless claims continue to fall under Donald Trump’s reign, coming in at 211,000 vs the previous week’s 212,000. Jobless claims are now around their lowest levels in around 50 years, assisting US dollar strength. Although Trump is mildly rough around the edges, he seems to be turning the screws where they matter the most. How long he keeps this kind of performance up is anyone’s guess.

Big news coming out of the US this week saw an antitrust ruling against Qualcomm for charging too much for royalties on their patents, sending its stock more than 10.00% lower. The monopolistic supply agreements and relationship that Qualcomm had with Apple Inc. also didn’t help the situation.

Sticking to the tech sector, Trump’s unprecedented ban on Huawei’s dealings with any US partner has shaken the tech sector. Trump, pointing toward espionage and cold-war-like spy tactics, instructed an emergency-like discontinuation of any relationship US companies had with Huawei. Google then subsequently announced that any Google related application will no longer be worked on or upgraded on Huawei devices. Although this sounds petty, just remember that most smart phones use the Android operating system, governed and owned by Google. Having said this, Huawei has had their own operating system in development since 2016, which should come in handy when Android officially discontinue the release of their operating system on new Huawei mobile phones. Just when one thought the US-China trade war was coming to a happy middle ground, a proxy battle breaks out.

US EQUITIES

US stocks have also experienced their fair share of battering, albeit holding well compared to other global markets, with all three major indices dipping around 2.00% in the last 5 trading days. With the levels we’re currently seeing on the Dow Jones, NASDAQ and S&P 500 being questioned, it’s important to note that these levels that we’re seeing on US markets are actually roughly where they need to be, when looking at the performance of general company earnings over the last earnings season. If we see some form of a mini-crash in the market, as we did in October/November 2018, it could be a great time to deploy some money into the capital markets. This, specifically pertaining to US indices.

Having moved negatively within a band of 16.00% over the last month, Apple opens Friday’s trading day at $179.66 a share, largely impacted by Trump’s little chess game with China.

In other news, the bears have finally dug their claws into Elon Musk’s Tesla, leading the stock to fall over 25.00% in the last month. Is this an ideal time to look at loading up on some of the stock? Now worth half the price that Musk tweeted about ($420.00), Tesla car orders still seem to be drifting in consistently, while car production and output are also predicted to meet expectations. One mustn’t forget the Tesla factories going up in China, which could offer Musk an easier way around the trade war. Tesla opens Friday’s trading day at $195.49.

The week ahead will continue to see equity market navigating these rough seas, however some cracks are starting to appear.

FAANGs performance, for the month of May-to-date:

Facebook: down around 4.25%

Amazon: down around 2.82%

Apple: down around 11.36%

Netflix: down around 4.39%

Alphabet: down around 1.61%

Year-to-date, the Dow Jones is up around 9.27%, the NASDAQ: 14.97% and the S&P 500: 12.58%.

In South African rand-terms, add 0.97% against each of these return-figures to see what the South African investor could be up in 2019, with the currency-effect added.

COMMODITIES

The shadow of the trade war seems to reach further than most expected, with the oil sector taking a major step back this week – Thursday having been its biggest one-day drop in six months (Brent Crude falling as much as 4.78% on the day, while West Texas Intermediate dipped 5.80% at its worst point in the day). WTI falling below $60.00 a barrel and Brent below $70.00 a barrel, for the first time since the beginning of April.

With US stockpiles of WTI oil ramping up, and a murky global economic path ahead, oil was seen dipping mainly on the back of uncertainty shrouding global oil output and demand in the near future.

Brent Crude opened Friday’s trading day at $68.60 per barrel (down around 6.59% for the week), while WTI opened at $58.82 (down 8.19% for the week).

Gold and palladium had a relatively stable week, while Thursday saw both the US dollar and the gold price moving stronger together. This, usually pointing toward a global thought-pattern of risk avoidance, where possible. Instances where both gold and the US dollar move in unison should be noted quite heavily by the global investor. Not much was available to report back on about platinum, yet the least favoured precious metal of 2019 was seen slipping by around 2.70% during the last trading week.

On Friday morning, gold, platinum and palladium were trading at levels of around $1,283.00, $800.13 and $1,315.40 per fine ounce respectively.

SOUTH AFRICAN POLITICS

South Africa saw their YoY consumer price index (CPI) numbers for April coming in slightly lower than expect at 4.40% vs analyst expectations of 4.50%. Thursday saw the South African Reserve Bank keeping the interest rate stable at 6.75%. The Prime rate also remained unchanged at 10.25%.

While Cyril Ramaphosa remains under immense pressure to change the dynamic in the African National Congress (ANC), coupled with trying to keep South Africa’s heartbeat ticking, business confidence and overall citizen confidence continues to decay. Can Ramaphosa actually make some form of a positive impact? Although many opportunities may be found in chaos and disaster, South Africa is treading on a fairly fine line when it comes to the belief in a better future.

The South African rand now trades around 1.00% weaker to the US dollar since the beginning of the year. Should the political situation follow a more uplifting and progressive path going forward, one may see the rand strengthening to levels of around R13.75 against the dollar. In an absolutely flattering world, levels of R13.30 may even be seen. But as one stands, gazing upon the raging economic turmoil out there, rand weakness, heading toward the R15.00 mark against the US dollar shouldn’t be considered too unrealistic. Another thing to remember is Moody’s Credit Rating Agency’s potential downgrade that may be delivered to South Africa in the coming months. Should this happen, then we’ll start to see some fireworks… and not the good kind… more-like those bright-red emergency maritime flares.

SOUTH AFRICAN EQUITY

Is South Africa becoming an entirely uninviting investment destination?

South African equities have taken a massive blow this week, due to the tidal waves sent through emerging markets, following the US China scuffle. With SA’s political landscape still trying to find a way forward, the global slowdown and now the decay of emerging markets through the trade war, things aren’t looking too bright on SA shores when it comes to the equity market. And to top this all off, the almost clandestine behavior seen in a growing amount of South African listed entities has seen liquidity drying up on the Johannesburg Securities Exchange (JSE) in 2019.

This week saw Massmart, Brait and Sasol all experiencing devastating 10.00% down days – a trend that seems to be becoming a normal daily event on the JSE.

Massmart: headline earnings guidance said to almost halve for the six months to June 2019. New CEO also appointed, Mitchell Slape – from US’ Walmart.

Sasol: Lake Charles project cost increases to around 50.00% more than initially planned. Total expected cost of the project to come in at around $12.75 billion – $1 billion more than expected three months ago.

Brait: Net asset value of their business to fall between 23.4% and 27.00%. This sending the share price to seven-year-lows of around R20.45.

Having said this, these market moves that local shareholders have to uncomfortably and more consistently ride-out have started to become a topic of concern. Are South African companies trustworthy anymore? Have they miscalculated the economic trends we’re seeing in 2019? Is the JSE watchdog being strict enough on the portfolio-damaging moves that have become all too familiar on the All Share Index? Is liquidity drying up on SA shores?

Here’s some of the bigger movers on the JSE for the 2019 year so far, as at Friday morning:

Impala Platinum: up 47.38%

Kumba Iron Ore: up 52.36%

Lonmin: up 33.73%

Tongaat Hulett: down 65.51%

Rebosis Property Fund: down 66.91%

Delta Property Fund: down 48.44%

Year-to-date, the JSE All Share index is up 2.91% and the Top 40 up 3.35%, both taking quite a knock over the last trading week. Sector-wise, industrials have now returned 5.45%, resources 3.26% and financials -0.80% for the 2019 year so far.

THE WEEK AHEAD

One needs to take caution of a potential crack in the equity markets that will ultimately be artificially driven by the US China trade war. Emerging markets and European stocks are at attractive prices currently, however a more patient approach may see the underlying investor shaping better in the longer run, given the current economic and political climate. Closer to home, a keen ear should be focused on Ramaphosa and his plans for our beloved country.

“Sell in May and go away”, they say.

When looking at the JSE All Share index specifically, if you’d sold (closed one’s JSE All Share position) in May every year since 1996, the market would’ve beaten you 15 out of those 22 years. Just goes to show that fairy tales should remain in the story books.

On Friday morning the rand would’ve set investors back R14.43 per Greenback, R16.16 a euro and R18.30 a British pound.